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Heard on the Street: Change Afoot For Markets In the U.K. -- WSJ

24 Jun 2017 6:32 am
By Richard Barley 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the US print edition of The Wall Street Journal (June 24, 2017).

One year on from the Brexit vote, discerning the U.K.'s future outside the European Union is still difficult.

Markets, however, distilled things into a more straightforward proposition: for much of the past year, Brexit has been bad for sterling but good for the benchmark FTSE 100 stock index. That might be changing.

Sterling has been the key barometer of the U.K.'s fortunes. The more disruptive the prospect of Brexit appeared to be, the more the pound fell. But that was good news for the FTSE 100, home to large multinational companies whose foreign earnings are inflated by a weaker pound. Just 26% of their revenues come from the U.K., BNP Paribas notes.

Sterling and stocks, which were uncorrelated before the vote, became negatively correlated. Sterling has made a big difference to returns: in local-currency terms the FTSE100 is up 17% since the vote; in dollar terms it is little changed.

But things might not be so simple now. Sterling is up 3% against the dollar this year. The last week has seen new underpinning emerge for the currency with a surprising shift toward tighter monetary policy from a number of Bank of England rate-setting officials. Uncertainty around Brexit means sterling faces challenges in marching higher from here, but the currency tailwind for the FTSE 100 has faded.

And it is the economies on the other side of the negotiations that are now on the march. Eurozone stocks have fared better this year as political risks on the Continent have declined and growth has accelerated. International investors may bypass the U.K. if they are coming to Europe. The U.K. economy faces a wage squeeze and the reality of Brexit may yet lead to disruption for companies.

The clock is now ticking on the Brexit talks, and the hard yards lie ahead. For U.K. stocks and sterling, it may not be such a simple equation.

Write to Richard Barley at richard.barley@wsj.com

(END) Dow Jones Newswires

June 24, 2017 02:32 ET (06:32 GMT)

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